How does a bridging loan work?

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How does a bridging loan work?

1 November, 2018

What is a bridging loan?

A bridging loan is a short-term funding option primarily used ahead of either:

  1. an alternative longer-term funding solution becoming available; or
  2. the sale of an alternative asset or even the asset being borrowed against.

Or it can simply act as a short-term loan option for a variety of purposes.

Bridging loans were historically designed to help people complete the purchase of a property before selling an existing one i.e. bridging the gap between the purchase and the sale.

However, they have evolved over the years. A property is offered to secure short-term funding for a range of different purposes rather than just purchasing a property whilst a sale is awaited on another.

Invariably they are now unregulated loans.

In simple terms, a bridging loan involves offering a property – usually a residential property – as security to a lender, such as MSP Capital, and using the value/equity within the property to secure a loan – normally on a short-term basis of no more than 12 months to suit a borrower’s requirements.

They can often be organised at short notice with bridging providers, such as MSP Capital, specialising in providing these loans quickly and easily.

Usually the funding will be via a 1st mortgage over the property. Sometimes, however, if there is sufficient equity, they will assist via a 2nd mortgage – subject to 1st charge holder approval.

Each lender will have their own lending parameters that dictates the maximum that can be lent.

MSP Capital will lend up to a maximum of 70% of the value of a residential property or 65% of the value of a commercial property.

The value of the property will be assessed by way of a formal independent valuation, which is undertaken on behalf of the lender but payable by the borrower.

The lender will charge fees and interest for the Loan with the amount of the charges depending on:

  1. the amount borrowed;
  2. the percentage borrowed against the property value; and
  3. the term the loan is required for.

The terms are then detailed in an Offer of Finance, which once accepted, will allow the lender to formally begin the lending process.

The mortgage and loan paperwork will then be dealt with by the lender’s and the borrower’s solicitors and once all formalities are completed the funds can be released to the borrower.

Repayment will be expected before the agreed term has expired although an extension will sometimes be required subject to agreement.

How long can you have a bridging loan?

MSP provide bridging loans for various periods of time to suit the borrower’s individual requirements. Bridging funding is generally considered as ‘short-term funding’.

The standard period for a straight forward bridging facility on a residential property would be up to 12 months. That said, 6-month terms are common place, although the loan can be repaid at any time from the day it is drawn.

Facilities can be agreed and provided in a very short space of time and provide the ultimate flexibility that enables clients to have confidence that funding is in place to either raise short-term cash for acquisitions or general business cash flow.

MSP has recently launched a medium-term bridging loan facility more akin to a standard ‘Buy to Let’ that can be for either a 2 or 3-year period. This provides certainty for a longer period, although can be agreed as quickly and easily as the ‘standard’ short-term bridging facility.

Bridging loans are generally taken to provide the borrower time to either sell the property asset or arrange longer-term finance.

Where can I get a bridging loan?

Most UK financial institutions will provide bridging loan facilities. These range from the main high street/clearing banks to the ever-growing number of 2nd tier lenders such as MSP Capital.

MSP Capital can provide bridging loans to any legal entity including limited companies, limited liability partnerships and in sole names.

As an unregulated lender, MSP bridging loans focus on the property value (we lend up to 70% of RICs valuation) more so than debt serviceability, which adds to the speed and flexibility when providing the facility.

MSP Capital can act quicker than its competitors in the bridging loan sector, which is a major factor in securing funding. The application process is a simple 3-page form. As MSP Capital lends its own funds, the loan is usually approved and credit backed within 24 hours of the initial enquiry.

Draw down of funds with MSP Capital can occur in matter of days if the legal and valuation process can be expedited efficiently.

If you have an enquiry about our bridging loan product or if you are simply looking to chat through your options, we want to hear from you.

For further information about bridging finance, please contact the team at MSP Capital on 01202 743400.